The AltFi Frontline: A Continental Disparity

The alternative finance movement all began in the UK with the launch of peer-to-peer consumer lending platform Zopa way back in 2005. 9 years removed from emerging as a lone operator, the platform sits atop a wide and diverse range of UK-based alternative finance platforms.

By way of context, the UK alternative finance marketplace is ahead of the curve in many respects, but it does not lead the way in all things. The megalith US operators dwarf those in the UK – with Lending Club alone having originated upwards of £4 billion in total loans. Part of the reason for the immensity of Lending Club and Prosper is the heavy institutional involvement in peer-to-peer lending in the US – something that is again at a more advanced state than it is in the UK market.

But I digress – the focus of this column is not to make a comparison between the US and UK market, but rather to try to understand why the UK has developed into a veritable hive of alternative finance activity – and why continental Europe has languished by comparison.

The UK market’s largest players are the consumer lenders Zopa and RateSetter, peer-to-business lender Funding Circle, and online invoice finance provider Market Invoice. Between them these platforms have provided close to £1.5 billion in consumer and small business finance – and each platform has facilitated upwards of £100m in lending in 2014 alone.

The UK also boasts a highly advanced, and rapidly growing, middling tier of platforms – and in truth these middling platforms are comparable in scale to the leading European operators. The UK platforms sitting between the £10m-£100m range are LendInvest,Wellesley & Co.,Assetz Capital,Crowdcube,ThinCats,Folk2Folk,Platform Black and Sancus. The majority of these platforms routinely post month-on-month growth rates of more than 10%. The property-lending space in the UK has been especially impressive of late – and it’s not a stretch to say that a few of the participants will be rivaling the nation’s largest platforms in scale before long. The average monthly growth rate of LendInvest,Wellesley & Co. and Assetz, as of July 1st, stood at 24.93%.

The UK is also home to perhaps the world’s most vibrant equity crowdfunding scene. Crowdcube kicked things off in 2010 and has now arranged upwards of £30m in finance for young companies. Other significant operators within the space include Seedrs,Syndicate Room and CrowdBnk – and more pop up all the time – most recently Volpit and Property Moose. No two of these platforms are the same. Seedrs differentiates itself through a nominee shareholder structure, Syndicate Room allows the crowd to co-invest alongside Angels, Property Moose enables equity investments in property, and so on. This brings me nicely onto the next point…

Diversity amongst platforms is sky-high in the UK – and that in itself is an indication of an advanced market. The major platforms are of sufficient scale and reputation that subsequent entrants must enter the game with a distinct USP of some kind. Without generalizing too much, it’s certainly true that many of the most recently emerged platforms are also the most niche. Crowd Racing, for instance – a platform that allows retail investors to grab a stake in a racehorse.

I would argue that Europe does not feature that same broad spectrum of diversity. There are certainly some highly innovative sites out there – such as Trustbuddy – the short-term P2P lender, and Lendahand – the P2P provider for SMEs in emerging markets. But many European platforms have actually employed a very “typical” peer-to-peer, equity or invoice finance model – and the reason they can afford to do that is due to the largely uncompetitive nature of continental alternative finance.

To clarify my point, the UK’s early movers are naturally more advanced than the later-launched European platforms – and that’s one reason for the disparity between the two markets. But their presence also drives constant diversification within the UK space – and that variety is perhaps the more important distinguishing factor.

Another sign that the UK market is coming of age is the institutional attention that many of the platforms are beginning to generate. To list but a few of many examples:

Specialist SME finance provider GLI Finance continues to put money to work across and within various up-and-coming platforms.

There have been a raft of equity investments in the space – most recently Funding Circle raised $65 million in a Series D fundraising round.

A sound regulatory regime is one of the reasons that institutional investors feel comfortable wading into the space – but the regime in itself is also a stamp of legitimacy for the industry. The FCA is not without its detractors – the 10% rule enforced in the equity crowdfunding space was not received with universal enthusiasm, and many argue that the peer-to-peer focused rules are still too light touch. But perhaps the clearest pointer of the value of the FCA’s presence came when leading European consumer lender Bondora ventured to the UK in search of the regulatory body’s stamp of approval. There simply is no comparable agency on the continent from which to acquire a licence – and that’s another significant limiting factor for the platforms.

It is also plainly evident that the UK government is fully behind the alternative finance movement. The Business Secretary Vince Cable attended the AltFi Summit in March and – as if by magic – ISA inclusion and a government consultation into the possibility of a mandatory bank referral system were unfurled within a couple of weeks. The British Business Bank has lent significant amounts of money to SMEs via a number of platforms – such as Funding Circle and Platform Black. Few countries can boast the same level of state support – and indeed in many countries governments have in fact held alternative finance providers back.

Perhaps the most telling indicator of the UK market’s position of strength is the fact that many operators are now branching out overseas. I’ve highlighted some of UK platform’s international activity below:

Funding Circle moved across the Atlantic in October 2013 by partnering up with a US company by the name of Endurance Lending Network. Funding Circle will likely have lent $100m to US small businesses by the year’s end.

RateSetter announced in April that it would go live in Australia this Summer – and has since hinted at further expansion into New Zealand and Asia.

Crowdcube has signed seven partnership agreements around the world – in Brazil, New Zealand, Spain, Sweden, Italy, Poland and Dubai.

Seedrs was the first equity crowdfunding platform to open its doors to businesses from every European country.

Secured lender ThinCats announced in June that it will be rolling out its services to Australia and Poland.

I suspect an increasing number of burgeoning UK platforms will look to distant lands in search of continued growth. The major UK operators have the reputation, experience, size and investor-base – what most are lacking is an adequate supply of finance needy businesses and individuals.

The only sub-sector of the alternative finance spectrum that is reasonably well-accounted for on the continent is consumer lending (think Bondora, Auxmoney, Pret d’Union, Smartika,Lendico,Prestiamoci, Trustbuddy, etc.). The European invoice finance, equity crowdfunding and peer-to-business lending arenas are largely barren. That is not to say that there are no operators (Dansk Faktura Børs – invoice finance, Symbid – equity crowdfunding, and Lendino – business lending), but the opportunity is nonetheless immense.

Why, then, are there not more European platforms in each respective sector? We’ve touched already on strong diversity, the state of regulation and a swell of government support. I asked the investment bank Liberum – which is heavily involved in the P2P space – for their thoughts:

“Continental European P2P is relatively underdeveloped vs. the UK with e.g. 1H14 volumes of €71m compared to €606m in the UK. We attribute this difference to London being a global financial centre and also UK regulation being much more accommodating to financial innovation.”

To summarize, with the UK market bursting at seams with ballooning incumbents and a continuous stream of innovative fresh faces, Europe seems to me the most obvious beneficiary of a UK platform spillover.

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